Tag Archives: Finance

The Biggest Problem the World Faces: No Stable Unit of Account

Here’s the best way to put it: Quantitative Easing (QE) is like saying that simply feeding a guy will make him exercise more. It doesn’t. It just makes him more fat (inflation). On the other hand, someone who is working out and growing muscle (ie, a metaphor for a growing economy) does need to be fed more (i.e. in economic terms this is the time to increase liquidity) or else his body won’t have the energy or building blocks to create the new muscle (i.e., analagous to derailing a growing economy by raising interest rates and choking it.) Either way, whether we have growth or recession, we can’t win. And that’s why we have continual crisis after crisis, at a time in our Civilization’s history when there should instead be a Cornucopia of Abundance for all and a Golden Age.

The sole mandate of the Federal Reserve, or any “Central Bank” should be to keep the supply and demand of liquidity (a fancy word for money) in balance. If there’s too much supply in relation to demand, then you get inflation. And this is the ONLY cause of inflation. They would have you believe that growth causes inflation, and that inflation is somehow a ‘natural’ occurence. But growth in no way causes inflation. Because growth causes an increase in production as much or even more so than it does in consumption. Growth also causes innovation with increases in productivity and efficiency. They try to make you believe that inflation is a natural occurance so that they can keep their jobs, their huge budgets, and their elevated status in society of some kind of Knights continuously “fighting inflation.”

On the other hand if demand for liquidity outstrips supply, which is the case usually during economic booms, not only does this cause ‘deflation’ but even worse it chokes off the “air supply” of much needed liquidity and kills the boom in it’s tracks. An example of this would be the late nineties economic boom caused by the Internet boom that went suddenly bust in 2000, not because of failed business plans, but because the air supply was cut off. An example of the deflation of that period was when oil hit $10 a barrel.

So, the Federal Reserves actions not only cause and unstable unit of account, they actually cause the downturns and “Financial Crises'” that seem to be a continual part of our lives, which is so ironic considering the times we live in: Technology and Science, whose knowledge and actual physical products are doubling in power and efficiency every 12-18 months, driving productivity increases throughout every area of our economy. Indeed, under such salutary conditions, it should be impossible to have any kind of economic crisis. There must be something that is throwing a monkey wrench, so to speak, in our economy, and unnaturally derailing it.

The biggest problem in the United States and the World is that adding Monetary Liquidity doesn’t stimulate economic activity. It only causes inflation. And through inflation, it actually sludges up and slows the economy even more. That’s the biggest problem that the World faces: is that we don’t have any Standard Unit of Account.

Only three things can increase economic activity: An increased appetite for risk, more work, or more efficiency, which is usually supplied through innovation.

People are only going to work more if there is a financial incentive (unless they are one of the lucky few who love their work so much, that they’d rather be doing that than what they like to do in the free time. This is why a lot of people advise that whatever it is that is your hobby, you should consider making into your career. Or the other famous phrase that’s been used so much that it’s almost lost its meaning: ‘Do what you love.’ Or Joseph Campbell’s famous phrase: “Follow your Bliss.”)

So, basically, the only way to achieve this kind of productivity, is through fiscal policy, reducing the amount of tax upon physical work. Allowing workers to keep more of what they earn.

Increasing productivity through efficiency is intimately tied to innovation, which not always, but almost always is tied to the first part of the equation, which is an increased appetite for Capital Risk. This second part can only be achieved fiscally as well. A decrease or elimination of all unnecessary regulation (ie, regulation that is not helping or protecting the public) and a lowering or completely zeroing out of the Capital Gains tax. Indeed, many Economists believe (Alan Greenspan being one, I think) that the no. 1 impediment to raising the standard of living for all is the Capital Gains tax.

This is not a tax on merely the “Wealthy.” For taxing Capital Gains directly decreases the amount and the rate of innovation in every area of society and the economy, which has a direct impact on the standard of living for all. Also, the Capital Gains tax is applied to every amount. So if a middle class or lower middle class person makes, say $1000 on a successful use of his mind and productive flow of capital into an area of growth in the form of a successful investment, he is taxed the same rate as someone who makes a million. And one could argue that the $300 confiscated from him is more of a discouragement as well as a practical harm, from a day to day living standpoint, than the $300,000 confiscated from the Wealthy person.

And what is more is that it’s the millions of thousand dollar investments that make up a much more huge majority of the nations Capital markets than the few million dollar investments. Whether they are in the form of a stock certificate on Wall Street or a small business on Main.

The Unnatural Phenomenon of Inflation

You Go, Blanche Lincoln!

We Need A Gold Standard for Economic Prosperity

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gold image

(Two email letters I sent concerning this subject)

March 22nd, 2009

Dear Adam Curry (@adamcurry),

Ending inflation and deflation is very simple. All that has to happen is for the Fed to keep the dollar/gold ratio in a tight range by printing dollars when the price of gold gets too low (ie 1997, $10 barrel oil) and selling bonds when the price of gold gets too high (ie Now!) to soak up the excess liquidity. There was no inflation or deflation until 1971 when Nixon closed the London Gold Window where one could exchange 35 dollars for an ounce of gold. Oil was 3.50 per barrell. When he closed the London gold window, the dollar became a floating currency and the great inflation of the 70’s began. There was no energy crisis. There never has been. We don’t need a Gold Standard per se, where we actually store the stuff, we just need a de facto Gold Standard where the relationship between the paper currency and the metal stays steady. The Fed has the tools to do this easily. Why is it not done? Because the establishment knows how to profit from these wild swings in prices, while the common man gets screwed. If you look at a chart of oil from 1920 until now it basically doesn’t move until 1971, and then the line goes up like Mount Everest. How is this possible during a time when the car and airplane were invented? Its simply because all inflations and deflations are monetary, ie floating currencies, and when the supply and demand of money itself gets out of whack so do the prices of all the commodities. You ask about a World Reserve Currency. We have one. Its called Gold. Everything is ultimately priced in terms of it.

Stephen Pickering (@pickering)

Little Rock, AR, US

Crude Oil Chart 1920 til present:

March 23rd, 2009

To: Mr. Sergei Perminov, Rye, Man, & Gor Securities, Moscow, Russian Federation

Dear Mr. Perminov

Your quote in the Moscow Times is absurd:

“This is all in the realm of fantasy,” said Sergei Perminov, chief strategist at Rye, Man and Gore. “There was a situation that resembled what they are talking about. It was called the gold standard, and it ended very badly.”

http://www.themoscowtimes.com/article/600/42/375364.htm

The Gold Standard didn’t end badly. Nixon closing the London Gold Window in 1971 is what has ended badly. In other words, getting off the gold standard is what has ended badly. Look at this oil chart from 1920 until today. Look what it did beginning in 1971 when Nixon took the dollar off a de facto gold standard:

The only solution to this is having a “de facto” gold standard whereby the Fed keeps the dollar in a stable relationship with the price of gold. It can easily do this by printing currency when the price of Gold starts lower too much and vice versa selling bonds into the open market to soak up excess liquidity when the price of Gold begins to get too high. That’s the only way to end inflation and deflation that never existed before 1971. Keeping things the way they are will only keep the misery going. Look where its got us. The common man gets ruined, businesses can’t plan, and the engine of the economy has a monkey wrench thrown into it without a stable, standardized unit of account.

Government Causes Credit Freeze

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And the Crisis is purely a fiction. I am listening to Bernanke in the background testifying in the Senate. None of this would be happening without the Mark to Market rule. None of it. 8% of mortgages have defaulted. Mark to Market has caused 100% of them to marked down creating billions of false, paper losses, and a false lowering of assets, which brings in the regulators applying Capital Requirement Rules, which legally keeps the banks from lending. This freeze has been and continues to be created soley by the Federal Government. Pete Townshend is right. We do live on an immanence front, and it is purely a put on.

The Credit Freeze is 100% purely created by the government, and the solution can be implemented in one day. Simply eliminate “Mark to Market” and return the billions in false paper losses to the banks, so that their Capital structure is sound, their stock prices go back up, and they lend again.

I just heard Bernanke say “There is no ‘magic bullet'” Yes there is. There actually is no “Crisis” but since we are playing make believe, the Magic Bullet is simply to illeminate “Mark to Market” and it all magically goes away. But it is more advantageous to the Establishment to have a Crisis, because they know how to use it to their advantage.

It just occurred to me that this is an exact mirror of the false crisis of the immanence of Iraq’s danger to the U.S. used as an excuse to spend a trillion, actually to line pockets with a trillion. This is a false domestic crisis used as an excuse to spend a trillion, actually to line the pockets of legalized thievery with a trillion. Only its in the name of a “Domestic Crisis” instead of a Foreign Affairs “Crisis”

I posted this on the GilderTech Forum. Here were some responses:

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The Financial Crisis of 2008 was a Hoax

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Update: 3/30/13 – Wow, this article was written a long time ago, but political and economic shifts tend to play out over decades, so from that perspective, it’s not that old. Anyway, this story came across my Facebook newsfeed today. And I thought it was relevant, to this, one of my first blog posts, New Study Confirms Economy was Destroyed by Democratic Policies by Examiner.com.

If Congress had not required through law that Freddie Mac and Fannie Mae securitize loans to people who did not qualify**, the sub prime crisis, “ground-zero” of the whole thing, would have never begun. But even so, Sub Prime was only 1% of the mortgage market. It was not big enough to cause an entire Financial meltdown. What caused this brush fire to spread into a full blown conflagration of epic proportions was a simple but profoundly stupid regulation written in 1992 called the “Mark to Market” rule. Simply put, over the last 6 months banks and other financial institutions have had to write down enormous amounts of assets to below par, even when those assets are being held to maturity, and still performing. What determines the “market price”? Buyers of course. But since the loans, the assets have been packaged with other financial instruments, including the common and preferred shares of the intitutions themselves, they become mixed together under a dark cloud of “will the Fed, Treasury, or FDIC declare them insolvent and wipe out their shareholder equity overnite?” What buyer will step into that market? And so since there is no “buyer” for the securities, the “market price” of the assets becomes determined to be pennies on the dollar. Enter “Mark to Market,” a standard that has no basis in FASB or GAAP accounting. In GAAP accounting a profit or loss on an asset is only taken when a transaction takes place. No transactions have taken place because the market is frozen with fear. Even if there was a “fair” market value placed on these assets, the banks would not necessarily be willing to sell them. It’s their business to hold them to maturity and to make interest as an income. That’s how banks make money.

So it merely becomes a vicious cycle: Regulatory agencies force financial institutions to mark down assets that can’t be sold because of the fear driven into the potential buyer by the cloud of the Regulatory agencies themselves.

There is no financial crisis. There was no lack of regulation. What we have is a regulatory crisis. The source of this problem which is ruining and has the potential to ruin the lives of millions, is the government itself.

Why was was this financial crisis a hoax? Because the establishment knows how to take advantage of the wild swings. You know the old say, “Buy when there’s blood in the streets”? Creating “blood in the streets” is an opportunity for them, at the expense of the people. What can we do about it? Become educated, let our voices be heard, register to vote, and support representatives who represent the people and not “special interests” who are the agents of the Establishment.

(*Update 2-22-09) – I’ve noticed today that many analysts are confirming part of my theory. Santelli, Mike Holland, David Malpass, among others have said repeatedly today that private investors who were for a while buying these ‘toxic’ assets at 27-30 cents on the dollar, pulled back when the shadow of the Government stepped in.

**The Community Reinvestment Act